Event driven strategy is innovative and profitable, but which are the 3 most common event driven strategies? Let’s unravel the financial fabric and discover how these strategies turn events into profit opportunities.
Which are the 3 Most Common Event Driven Strategies?
The 3 most common event driven strategies are merger arbitrage, special situations, and distressed debt investing. These strategies provide investors with opportunities to profit from market price discrepancies, adverse corporate events, and financial distress.
- Merger Arbitrage
Price convergence is the goal of merger arbitrage. This event driven strategy exploits the spread between the announced acquisition price and the target firm’s current share price. Investors purchase target-firm shares and then sell them upon transaction close for a profit.
- Special Situations
Spin-offs, bankruptcies, regulatory and management changes, and restructurings are part and parcel of this event driven strategy. Investors identify and analyze these corporate events in search of undervalued assets and share mispricing capitalizing on uncovered discrepancies.
- Distressed Debt Investing
Distressed debt investing is the buying of the bonds, loans, or equity of a distressed company. The goal is to analyze the firm’s current condition and pending legal proceedings and determine the company’s prospects. Investors sift through the financial wreckage looking for discounted assets susceptible to a restructuring-induced value increase.
All three are effective strategies provided proper execution under favorable market conditions. No strategy is without its challenges and the following must be considered when answering the question, which are the 3 most common event driven strategies?
1. Risk Management
Merger arbitrage involves systematic and idiosyncratic risks, market price volatility, and an uncertain regulatory climate. Diversification and conservative position sizing should be the loss mitigating tools of the prudent arbitrage investor.
2. In-depth Research
Special situations, along with merger arbitrage and distressed debt investing, demand extensive, in-depth due diligence to glean a clear understanding of event effects on a firm’s valuation. Thorough risk and transaction terms and conditions research and time horizon awareness reduce losses and increase profit potential.
3. Cyclical Opportunities
Distressed debt investing is a cyclical event driven strategy. The opportunities increase during an inflationary interest rate environment. Debt investors have more candidates to choose from as the number of distressed firms increases.
Which are the 3 most common event driven strategies? Merger arbitrage may have, comparably, a higher potential for profit when target company shares are trading at a significant discount to the acquirer’s offer price.
Special situations can be a lucrative event driven strategy, as well. A value investor would be wise to consider event timing, outcome unpredictability and share liquidity as part of the decision process.
Distressed debt investing involves default and liquidity risk and requires active management participation during the restructuring process. Investors with intimate knowledge of corporate finance and bankruptcy law can successfully unlock the high returns of this unique event driven strategy.
Which are the 3 most common event driven strategies? Merger arbitrage, which capitalizes on price conversion, special situations are divestitures and restructuring profit generators, and distressed debt investing illustrates one investor’s fiscal trash is another investor’s financial treasure.
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